A Bulletin of Socialist Economic Analysis published by Ken Livingstone
Articles may be freely republished from Socialist Economic Bulletin provided the source is acknowledged

Thursday, 2 October 2014

Productive investment has not increased, so there is no sustainable recovery

By Michael Burke

The latest GDP data showed that the British economy is a little stronger than
previously thought. The economy is now 2.6% above its previous peak in the
1st quarter of 2008 and surpassed that peak in the 3rd
quarter of 2013.

However, the fundamental character of the current crisis is unaltered by the
revised data. The Office of National Statistics (ONS) is correct to state that,
‘The worst recession since our records began in 1948 has been followed by the
weakest recovery’. The path of the current recovery is shown in Fig.1 below, an
ONS chart which compares the level of GDP in previous recessions.

This very weak recovery is also confined to the services sector of the economy.
All other sectors of the economy, manufacturing, production and construction
remain in a slump. This is shown in Fig. 2 below, which records the change in
the sectors of the economy from the beginning of the recession.

Fig. 2 GDP levels (quarterly) for output components

Source: ONS

It is clear from this chart that there was a severe ‘double-dip recession’
caused by austerity which affected the productive sectors of the economy
excluding services. A number of service industries were boosted by a combination
of ultra-low interest rates and specific measures adopted by the government to
boost consumption. The industries to benefit included finance, and retail and
business services. Far from a ‘march
of the makers’ promised by Osborne, the current situation is repeat of the
errors of the Lawson Boom
and the ‘candy-floss
economy’, on a much weaker basis. The former Tory Chancellor argued that it
was immaterial that manufacturing was collapsing under Thatcherism as long as
there were overseas buyers of any good or service produced in Britain (including
candy floss, in reality financial services). This was before the boom turned to
bust.

The disparity shown in the different sectors of the economy is a function of
the great divergence in the components of GDP. All the main components of GDP
have now surpassed their level when the recession began in 2008 except for
investment. Household consumption, government expenditure and net exports are
all higher, only investment (Gross Fixed Capital Formation, GFCF) remains below
its previous peak. The change in GDP and its components in the recession is
shown in Fig. 3 below.

Fig.3 Change in Real GDP & components since the recession began

Source: ONS

Key parts of the service sector can grow without significant investment, at
least for a period. Industry, manufacturing and construction cannot. Investment
is the main brake on the economic recovery. It is not the case that the crisis
is caused by a deficiency of ‘demand’. Both household and government consumption
have risen but investment is still below its previous peak. Previously, the
decline in business investment was mainly responsible for the decline in GDP.
But that is no longer the case.

Business investment declined far more sharply
than the economy as a whole, down 23% from the peak to the low-point in 2009,
compared to a 65 decline for GDP. But it has now made a feeble recovery in line
with GDP.

Now it is government investment which accounts for the decline in fixed
investment. Even taking into account the highly seasonal variability in
government spending, the current level is 15.5% below the peak. The absolute
decline (not taking account of seasonal variations) is 54%. The change in real
business investment and the main component of government investment (not
including investment by public corporations) is shown in Fig. 4 below.

Fig.4 Real Business and Government investment, GFCF

Source: ONS

This illustrates a central plank of the austerity policy. The decline in
business investment proceeded the recession, driven by a declining rate of
profit. (This point ought to be wholly uncontroversial as even the mass of
profits fell in nominal terms at the beginning of 2006). After the fall in
profits in 2006 the level of investment in the productive sectors of the economy
began to decline and then fell rapidly producing the recession. For the period
which includes most of 2006 and 2007 this decline was masked by the last stages
of a housing and financial bubble. The level of real investment in the
productive sectors is shown in Fig.5 below.

Fig. 5 Real productive investment

Source: ONS

This important decline in the productive capacity of the economy is masked by
the statistical practise of referring to Gross Fixed Capital Formation in its
entirety, which includes both productive investment and other large items such
as residential investment and the transaction costs of investment in buildings,
including estate agents, surveyors and the like. While these may be necessary
and can provide a social good, they do not increase the productive capacity of
the economy.

None of the productive sectors has yet seen a recovery in the level of
investment from their peak level. Investment in offices and factories is the
largest component and is 16.4% below its previous peak, a fall of £23.1bn.

There is therefore no ‘puzzle’ at all to the crisis of productivity in the
British economy. The productive capacity of the economy is not growing and may
even be declining once capital consumption and real depreciation are taken into
account. If more labour is deployed, which is the case currently, output can
increase. But if the productive capital of the economy is stagnating or even
contracting, then this can only be reducing average output per hour. This is the
underlying cause of the crisis of living standards and of real pay. Workers are
working longer in less productive ways and so are being paid less.

The austerity policy includes a deep cut in government investment with the
false assertion that the private sector will fill the gap. Evidently this has
not occurred. The fact is that the fall in government investment is now the
largest single impediment to recovery. Given the interrelationship between
government and the private sector, this will have a depressing effect on private
sector investment. The reverse is also true. A large increase in government
investment would lead the whole economy to a sustainable recovery.